Examining the SEC’s Money Market Fund Rule Proposal

Oral Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

Subcommittee on Capital Markets and Government Sponsored Enterprises
U.S. House Committee on Financial Services

September 18, 2013
Washington, DC

As prepared for delivery.

Thank you, Chairman Garrett and Ranking Member Maloney, for the opportunity to appear before the Subcommittee today. The SEC rulemaking that you are examining is vitally important to the 61 million individual investors and thousands of institutions—including businesses, state and local governments, and nonprofits—that depend on money market funds as a low-cost, efficient cash management tool that provides a high degree of liquidity, stability of principal value, and a market-based yield.

For five years, ICI and its members have worked diligently with the SEC, with Congress, and with other regulators on ideas to make money market funds more resilient under even the most adverse market conditions. The SEC has 40 years of success in regulating these funds. Its expertise and experience mean that the Commission is in the best position to implement any further reforms.

In our work on money market funds, we have consistently stressed two principles:

First, that reforms should preserve the fundamental characteristics that make money market funds so valuable to investors and the economy; and

Second, that we should preserve choice for investors by ensuring a continued robust and competitive global money market fund industry.

Applying those principles to the SEC’s rulemaking proposal, I’d like to offer five summary conclusions:

First, we agree with the Commission that there is no reason to apply structural changes to funds that invest primarily in Treasury and other government securities—collectively, government money market funds.

Similarly, funds that invest primarily in short-term debt of state and local governments should be exempted from structural changes. The characteristics that the SEC attributes to government funds apply with equal force to these tax-exempt funds. There is no evidence that investors in tax-exempt money market funds redeem en masse during periods of market stress. Moreover, these funds hold the great majority of their assets in highly liquid securities that can be liquidated to meet redemptions. Experience shows that credit deterioration in securities issued by one jurisdiction does not tend to affect other jurisdictions’ securities. Given the vital role that they play in financing state and local governments, tax-exempt funds should not be subjected to disruptive and expensive structural changes.

Third, in discussions with our members and their shareholders, one thing has become clear: combining the SEC’s two proposals would render money market funds entirely unattractive to investors.

The Commission’s proposal confronts investors with a choice: sacrifice stability, in the case of floating net asset values on prime institutional funds, or face the prospect of losing liquidity under extreme circumstances, through the proposal for liquidity fees and temporary gates. We have found that some investors place more of a premium on principal stability, while others value ready access to liquidity more strongly.

Virtually every ICI member tells us, however, that no investor would purchase a floating-value money market fund that was also subject to constraints on liquidity. Investors have other, less onerous options readily available.

Fourth, if regulators do feel it is necessary to require some money market funds to float their values, it is critical that we address the significant burdens on investors in the tax and accounting treatment of gains and losses. This will require action by Treasury and the Internal Revenue Service—and perhaps by Congress. Unless these issues are resolved in advance, investors are unlikely to accept floating-value money market funds—and significant disruption of short-term credit markets is likely.

Finally, we support the Commission’s recognition that its proposals should be appropriately targeted, and that funds intended for retail investors should be exempt from any requirement to impose floating NAVs. We have significant concerns, however, about the practicality and costs of the SEC’s proposed definition for retail funds, based on daily redemption limits.

Instead, we recommend the use of Social Security numbers as the fundamental characteristic to identify investors eligible to invest in retail funds. This approach would be far less costly than other methods of defining retail funds—and far easier for investors to understand.

In the five years since the financial crisis, the fund industry has supported the SEC’s efforts to make money market funds ever more resilient, even as they continue to play their valued and important role for investors and the economy. We appreciate the support that many members of this Committee have shown for those efforts.